Covance Grows EPS 26%; Delivers Record Orders And Margins

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Princeton, New Jersey, October 19, 2005 — Covance Inc. (NYSE: CVD) today reported earnings for its third quarter ended September 30, 2005 of $0.49/diluted share and net revenue of $295.4 million.

"In the third quarter, Covance continued to deliver strong financial results with revenue growth of 15.2% and operating margins of 14.9%, leading to another quarter of earnings growth in excess of 25%," said Joe Herring, Covance's President and CEO. "Revenue growth was balanced between our Early Development and Late-Stage Development segments which were up 16.0% and 14.5%, respectively. Covance's operating margin increased 60 basis points sequentially to a record high 14.9%, led by exceptionally strong margins in Early Development of 26.1%. Overall company productivity, as measured by revenue per employee and operating margin per employee, continued to increase on both a year-over-year and sequential basis. We expect further overall margin expansion to be fueled by economies of scale in our lab-based businesses, faster growth of our more profitable service offerings, and further productivity enhancements through the expansion of our Six Sigma program and technology automation.

"On the business development front, we are very pleased to report record net orders of $368 million in the third quarter, driving a $68 million sequential increase in our backlog. We continue to see strong demand for outsourced drug development services as our pharmaceutical and biotechnology clients seek more effective methods for bringing new drugs to market. We intend to capitalize on these positive market dynamics by focusing on operational and service excellence, continuing to invest in our unique integrated service offerings, and further developing strategic client relationships.

"Our strong year-to-date results lead us to increase our 2005 earnings target from at least $1.88 per share to at least $1.91 per share. In addition, our growing backlog of orders leads us to target 2006 earnings per share of at least $2.30 (excluding the impact of expensing stock options under SFAS 123R), representing Covance's sixth consecutive year of earnings growth in excess of 20%."

Consolidated Results

($ in millions except EPS) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change
Net Revenues $295.4 $256.3 15.2% $870.6 $751.6 15.8%
  Reimbursable Out-of-Pockets $11.6 $7.6   $36.7 $22.5  
Total Revenues $307.1 $263.9   $907.3 $774.1  
Costs and Expenses $251.3 $220.2 14.1% $743.7 $649.4 14.5%
  Reimbursable Out-of-Pockets $11.7 $7.6   $36.7 $22.5  
  Total Costs and Expenses $263.0 $227.8   $780.4 $671.9  
Operating Income $44.1 $36.1 22.2% $126.9 $102.2 24.1%
Operating Margin % 14.9% 14.1%   14.6% 13.6%  
Net Income $31.2 $25.2 24.1% $89.6 $70.6 26.9%
Diluted EPS $0.49 $0.39 25.8% $1.41 $1.09 28.8%


Operating Segment Results

Early Development

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, and Phase I clinical trial services. Early Development net revenues for the third quarter of 2005 grew 16.0% to $140.5 million compared to $121.1 million in the third quarter of 2004 on strong performances across the broad portfolio of the segment's service offerings. Year-to-date, net revenues grew 15.2% to $411.2 million compared to $357.1 million in the prior year.

Operating income for the third quarter of 2005 increased 26.6% to $36.6 million compared to $28.9 million for the third quarter of last year. Operating margin for the third quarter of 2005 was an exceptionally strong 26.1% versus 23.9% in the third quarter of the prior year and 24.1% last quarter. Margins were robust across Early Development service offerings. Year-to-date, operating margins were 24.9% compared to 23.5% in the prior year.


($ in millions) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change
Net Revenues $140.5 $121.1 16.0% $411.2 $357.1 15.2%
Operating Income $36.6 $28.9 26.6% $102.3 $83.8 22.2%
Margin % 26.1% 23.9%   24.9% 23.5%  


Late-Stage Development

The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, commercialization services (Phase IV studies and market access services), and cardiac safety services. Late-Stage Development net revenues for the third quarter of 2005 grew 14.5% to $154.9 million compared to $135.2 million in the third quarter of 2004. Revenue growth was led by the continued robust performance in central laboratories. Year-to-date net revenues grew 16.4% to $459.4 million compared to $394.5 million in the prior year.

Operating income for the third quarter of 2005 grew 12.1% to $24.3 million compared to $21.7 million in the third quarter of the prior year. Operating margin for the third quarter of 2005 was 15.7% versus 16.0% in the third quarter of the prior year. Strong performances in central laboratories, cardiac safety, and commercialization services were partially offset by clinical development, which was impacted by seasonal softness and increased hiring to service its rapidly growing backlog of new orders. Year-to-date, operating margins were 16.7% compared to 15.1% in the prior year.

($ in millions) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change
Net Revenues $154.9 $135.2 14.5% $459.4 $394.5 16.4%
Operating Income $24.3 $21.7 12.1% $76.8 $59.6 28.9%
Margin % 15.7% 16.0%   16.7% 15.1%  

Corporate Information

The Company's backlog at September 30, 2005 increased to a record $1.57 billion, up 19% from the $1.32 billion reported at this time last year and grew $68 million sequentially from the $1.50 billion on June 30, 2005.

The Company reported cash and cash equivalents of $140.4 million at September 30, 2005 versus $132.5 million at June 30, 2005.

Capital expenditures for the third quarter were $39.4 million and totaled $94.3 million in the first nine months of 2005. Free cash flow (cash from operations less capital spending) was $8.4 million in the quarter and $5.2 million year-to-date. We continue to expect 2005 capital spending to be in the range of $140-$150 million and 2005 free cash flow to be in the range of $20-$30 million.

Net Days Sales Outstanding (DSO) were 63 days at September 30, 2005 versus 60 days at June 30, 2005 and 56 days at September 30, 2004.



Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with annual revenues greater than $1 billion, global operations in 18 countries, and more than 7,000 employees worldwide. Much more informtaion about Covance can be found throughout the site, including our products and services, other recent press releases, and SEC filings.

Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.